According to research in South Africa, Foreign exchange trading, or Forex trading is a network that consists of both buyers and sellers who can transfer any currency between each other at a price upon which they agreed. Even the simplest as traveling aboard means having made a Forex transaction.
There are various reasons to trade Forex, some trade it for practical purposes while others trade it to earn a profit. Due to the currency which is converted on a daily basis, price movements of some currencies are significantly volatile.
Depending on the type of strategies that some traders use, traders can take advantage of these volatile conditions as it brings them great profit, but there are also increase risks due to this volatility.
Forex Trading does not occur on exchanges, but it takes place directly between two parties in a market known as over-the-counter, or OTC. A global network of banks run the Forex market and it is spread across these four major trading centres:
- London
- New York
- Sydney, and Tokyo
In addition, there are four types of Forex markets that can be identified, along with their features:
- The Spot Forex Market – where a currency pair can be physically exchanged at the exact point that the trade is settled (“on the spot”) and if not at the exact point, it can be exchanged withing a short period of time.
- Forward Forex Market – The sale or purchase of a currency pertains to a contract of agreement, the currency is then sold or bought at a specified price and it will be settled either on a set date in the future or in a range of future dates.
- Future Forex Market – A given currency is either sold or bought via a contract and at a set amount on a certain date in the future. These contracts are legally binding when agreed upon, unlike with Forward Forex.
There are however some traders who rather speculate on the Forex prices instead of planning to take delivery of the actual currency. These traders make predictions regarding the exchange rate to take advantage of price movements present in the market.
Price movements can be influenced by an array of things and thus exchange rate predictions can become challenging. However, the forces that primarily drive Forex is that of supply and demand. Some of the influences that drive price fluctuations include, but are not limited to:
- Central banks – who control supply. They may announce measures at any given time which will affect their currency’s prices significantly.
- News Reports – Investment is particularly encouraged in a specific region when positive news is reported on it, resulting in an increase in demand for the currency.
- Market Sentiment – Reactions to the news also play a significant role in driving currency prices. Traders trade according to the price direction in which a currency is heading, either increasing or decreasing demand.
Why is Forex Trading so popular?
There are certain currencies of major nations that have a tendency of remaining in demand. These currencies also see active trading on the Forex Market. This is due to international commodity along with finished product trading activities.
The Forex Market consists of different Forex Traders. Some may have a commercial need which drives them to buy or sell currencies while others take part with the sole purpose and intention of making profit from Forex transactions.
Another reason that Forex Trading is, and remains, so popular is the fact that the market of Foreign Exchange remains open and active 24/5.
In addition, the Forex Market has also seen significant growth in both size and breadth since the 1970’s due to several factors such as:
- Main Centres along with currencies – when looking purely at transaction volume, 60% of Forex trading activity is focused in London, New York, and Tokyo with some of the major currencies traded in these centres being USD, EUR, JPY, and GBP.
- Size and Products which are traded in the Forex Market – The Forex market’s daily global turnover is estimated to be over $3 trillion which results in it being the largest financial market in the world.
- Dramatic Growth of the Forex Market due to the floating of exchange rates since the 1979.
- The driving forces behind the growth in Forex trading activity in recent years can be attributed to volatility, globalization, risk awareness, international investment, improved communication, more advanced computing, and more.
- Liquidity which provides traders with execution costs that are lower in addition to tighter bid/ask spreads, with lower costs there are more traders who will trade Forex as opposed to other instruments.
- Diversity pertaining to trading instruments – serious traders can choose to trade contracts such as spot trades, futures, forwards, swaps, CFDs, ETFs, options and more.
What are the benefits of trading Forex?
There is a vast number of benefits that can be attributed to the trade of Forex and traders may each have their own, depending on the type of Forex they trade, their trading strategy, etc. but when looking at the benefits holistically, the following can be identified:
- Trading of Forex can occur 24 hours a day and 5 days a week.
- High liquidity which means that with large volumes of money movement in and out of currencies, the spreads are relatively low.
- Transaction costs are relatively low (depending on the broker).
- Forex is a leveraged product, but caution should be taken as with higher leverage comes the possibility of great gains, but also great losses.
- Rising and falling prices present potential for profit by either going long and buying when a currency pair’s value increases or going short and selling the currency pair should it become apparent that it may decrease in value.
MetaTrader 4 and why traders should make use of it to trade Forex
MetaTrader 4 or referred to as MT 4 by most traders is an online trading platform that was developed by MetaQuotes Software Corp. and launched in 2005. Even 15 years later and MT4 is still one of the most popular trading platforms used by brokers and traders alike.
The purpose behind the development of MT4 was for it to be used in trading mainly Forex, Futures and CFDs. It provides traders with the opportunity to conduct advanced trading operations in addition to being able to analyse the financial markets at the same time.
While a lot of brokers offer trading platforms that can be obtained either free, or at a discounted price given that they maintain a well-funded trading account, MT 4 can be downloaded for free from the MetaTrader 4 website or supporting brokers’ websites.
In addition, it can also be downloaded to traders’ mobile devices which run either Android or iOS from either Google Play or the App Store.
The trading platform is advanced and comprehensive while simultaneously being user-friendly and it has thus far been rated one of the best to use when trading Forex. In addition to the array of features that it has, Forex traders specifically can benefit from:
- Low latency and higher execution speeds
- Highly and easily customizable
- Web, desktop, and mobile trading is supported and transitioning between them is hassle-free and seamless
- Variety of charts and indicators
- High level of security and reliability, and more
What are Technical Indicators and why should Forex Traders use them?
Technical indicators are computer scripts, or mathematical manipulations which are executed on the trading platform that traders are utilizing. These indicators are able to perform complex mathematical algorithms based on historical price data.
This allows the indicators to forecast where the price may go in future, whether it will move in an upwards, or downwards trend.
Traders can use technical indicators to make decisions pertaining to whether and when to either open or close positions based on the signals received from these indicators. In addition to forecasting the price direction, they can also detect turn moments of prices.
Technical indicators can be divided into three different groups namely trend-following indicators, momentum indicators, and volatility indicators.
Trend-following indicators are used by traders to specifically determine the overall trend associated with a currency pair, whether the currency pair is moving upwards or downwards. Trend indicators change this value based on the underlying trend’s strength.
Momentum indicators are used by traders when they would like to follow the speed at which a price changes during a specific time period. While volatility indicators measure the volatility of the market or the market’s relative rate pertaining to price moves.
Technical indicators along with conducting a technical analysis helps traders in identifying trends along with support and resistance by making use of price charts, the different time frames in addition with using different technical indicators.
This can help and guide traders in determining not only when to enter a market or where exactly, but also when they need to exit and where.
In addition, technical indicators can form part of the trading strategies that traders deploy when trading Forex as it allows them to see past trends and prepare them for possible moves, which they can use in future.
Traders use technical indicators as part of their trading strategies to guide the decisions that they make and it forms a crucial part of entry, exit and trade management rules.
Although there is not a one indicator that is a fool proof way to guarantee trading success, there are several indicators that Forex traders need to familiarize themselves with.
Which Technical MetaTrader4 Indicators are provided?
In addition to the various features that MetaTrader 4 can boast with, provision is made for 30 technical indicators which traders can use in a variety of ways to provide them with crucial data and information on which they can base decisions.
Some of these indicators include, but are not limited to:
- MACD
- Bollinger Bands
- Stochastic Oscillator
- Relative Strength Index
- Money Flow Index
- On Balance Volume
- Accumulation/Distribution Line, and several more
Which MetaTrader4 Indicators should Forex Traders master?
Although MetaTrader 4 offers a vast number of technical indicators, and there is no single indicator that will guarantee success, there are technical indicators that Forex Traders have to familiarize themselves with and work to master.
MACD
Or the Moving Average Convergence/Divergence is used by traders as to indicate any changes that occur in the strength momentum along with the direction of the current market.
MACD can be used when traders try to spot certain high probability trading setups and it has proved to be an effective indicator when used in trading markets subjected to wide-swinging.
The MACD can either be used in crossovers, overbought/oversold conditions as well as divergencies.
Bollinger Bands
This indicator forms part of the volatility channel, which is another method used by traders to identify a certain trend. The start of a trend is identified should a price go beyond a moving average with an additional amount.
Invented by John Bollinger in 1990, it is still one of the best indicators used by Forex traders amidst other volatility channel methods that are available for.
The two parameters on which the Bollinger band is based includes the number of days for the moving average along with the number of standard deviations that the trader would like the band to be placed away from the moving average.
Stochastic Oscillator
Created by George Lane in the late 1990’s, this indicator remains one of the most popular indicators that is being used today. This indicator is used to determine both overbought and oversold conditions that are present in the market.
This tells traders whether there is too much being bough and therefore prices could be due for correction where in the case of overselling, the indicator shows the possibility of too many selloffs on a particular currency with the possibility of a due rebound.
Relative Strength Index or RSI
This indicator is classified, amidst others, as a leading indicator and effectively so as it is like the Stochastic Oscillator in providing clues and indications on overbought and oversold conditions in addition to divergences.
The overbought and oversold areas are indicated by the RSI line (which consists of only one line) which enters both an upper and lower area on the indicator. Should it occur that the RSI enters the upper level above a reading of 70, there is an overbought signal.
Should the RSI line enter the lower area below a reading of 30, the trader will be provided with an oversold signal.
In the case of divergence, the RSI line may diverse with the tops and bottoms of the price resulting in bullish and bearish divergences. Potential upward moves are forecasted by bullish divergences, while bearish divergences indicate the opposite.
Money Flow Index
The Money Flow Index, or MFI, is classified as a momentum indicator. It uses a financial instrument’s price along with volume to allow for it to predict the reliability on which the current trend is based.
The MFI often adds trading volume to the RSI and therefore it is often known as a volume-weighted RSI.
On Balance Volume
Also referred to as OBV, the On Balance Volume is applied with the purpose of gauging both the positive as well as the negative flow of volume in a specific security along with the relation to its price over time.
This indicator can be used by traders as a simple method through which a cumulative total of volume can be kept either by adding or subtracting the volume of each period, depending on the movement of the price.
Accumulation/Distribution Line
In addition to aforementioned indicators that are commonly used by Forex traders who utilize MetaTrader 4 as their trading platform, this indicator uniquely resembles the OBV indicator, with a significant distinction between them.
Where the OBV solely considers the closing price of the security for a certain period, this particular indicator also takes the trading range for the period into consideration and thus it provides the flow of money in a more accurate illustration.
Conclusion and Writer’s Opinion
At a glance, technical indicators may make little to no sense to beginner traders, where advanced traders are using them in various ways, either stand-alone or in conjunction with other indicators to create complex trading strategies.
With changing markets, strategies, and the indicators that traders use will also change as they may be forced to adapt, and often even abandon their strategies. MetaTrader 4 makes provision for a wide variety of technical indicators that can be used in a variety of ways.
Traders also have the option of downloading or purchasing more indicators from the MetaTrader 4 Market, so there is a vast array of possibilities and opportunities presented to traders.
Traders can test their strategies easily in a risk free environment by making use of the MetaTrader 4 demo account, or a demo account provided by a broker. Beginner traders can utilise this in the same way to practice strategies and test out different indicators.
MetaTrader 4 provides traders with the opportunity to trade in a way that completely fulfils their needs and can fulfil, and even exceed, the demands of the neediest traders, according to research in South Africa
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